Failure of the blends of epoxy cresol novolac resin (ECN) with varied proportions of carboxy terminated polybutadiene (CTPB) liquid functional rubber was studied. Addition of CTPB improves toughness as reflected in the improvement of tensile, flexural, and impact properties. However, 10 wt % of CTPB was the optimum concentration beyond which a rapid fall of properties, in all cases, was observed. Surface topography of the fractured surfaces, studied by scanning electron microscopy and atomic force microscopy, revealed marked changes in the phase morphology due to addition of rubber and also accounted for the variation of the strength properties.